WASHINGTON -- For investment advisors keeping an eye on regulatory developments in the nation's capital, the watchword of the moment is fiduciary.
Activities unfolding within three different industry rulemakers together suggest that brokers and advisors alike will need to evaluate their practices and the advice they offer investors with an eye toward closer scrutiny of their fiduciary responsibilities, according to Blaine Aikin, president and CEO of the consultancy fi360.
In a presentation this week at Charles Schwab's annual Impact conference, Aikin highlighted the separate proceedings to expand fiduciary advisors' responsibilities at the SEC and Department of Labor. But both of those initiatives remains a work in progress, he said; having encountered considerable political opposition, neither will be finalized before next year, at the earliest.
But that's only part of the story on the fiduciary front.
"In the meantime, FINRA has done some very interesting things," Aikin said. "Very significantly, FINRA is actually in action here, and I think it's something we all need to be aware of."
As examples of the "fiduciary overtones" he sees in the guidance FINRA has provided, he pointed to the enhanced due diligence requirements under FINRA's updated suitability rule, along with provisions stipulating that brokers and advisors consider investors' time horizon and liquidity when making investment recommendations.
"These are tiptoeing around the fiduciary standard. You can call it fiduciary lite, or quasi-fiduciary, but it's very definitely a raising of the bar by FINRA," Aikin said. "And as you probably are aware, FINRA is eager to be the regulator of the advisory community as well as the broker-dealer community."
FINRA has made no secret of its plans to step up industry scrutiny through its new suitability rule. Last May, two months before the rules took effect, the regulator offered guidance to help industry practitioners interpret their responsibility under the suitability standard, including a discussion of the expectation that advisors and broker-dealers make recommendations that are in the "best interest" of their clients -- borrowing language more commonly associated with fiduciary duty.
Then in January of this year, FINRA outlined its regulatory priorities for 2013, emphasizing that it will be on the lookout for financial professionals who help their retail clients invest in risky products that might fail the suitability test -- including business development companies and securities backed by commercial mortgages. In that same letter, FINRA noted that its enforcement activity had increased sharply following the implementation of the suitability rules.
PUSHING A FIDUCIARY STANDARD
Aikin has long championed the fiduciary standard, and a core part of his firm's business is the provision of training and resources to investment fiduciaries. On Monday, he reiterated his belief that financial professionals providing investment advice need to hold themselves to high account as trustees of their clients' money, irrespective of their particular regulatory requirements.
"We need to conduct due diligence that is actually going to get us to a determination of whether this is in the best interests," he said. "A culture of fiduciary responsibility would take an organizational commitment to adhere to a fiduciary ethic even in the absence of the formal fiduciary" obligations.
He suggested that the marketplace, particularly on the heels of the financial collapse, is increasingly coming to expect that financial professionals hold themselves to a higher standard -- and that the "best interest" rule, viewed outside the context of all the compliance requirements it entails, strikes many simply as common sense.
That is certainly the view at the SEC -- which, acting under a mandate in the Dodd-Frank Act, has been developing a set of proposed rules that would hold broker-dealers to the same fiduciary responsibilities that currently cover RIAs. Just this week, SEC Chairwoman Mary Jo White reiterated her commitment to moving ahead with those regulations, arguing that a uniform fiduciary standard is needed to ensure that retail investors who might not know if they're dealing with a broker or fiduciary-bound advisor receive the same caliber of advice. White did not offer a timeframe for when the SEC might publish its proposal for the rules.
But even in the absence of new fiduciary rules, the SEC has signaled that it is planning to increase examinations of the RIAs already under its purview in the coming year, aiming to visit new registrants and long-registered advisors who haven't been audited for several years.
There are similar concerns about consumer protections and potential conflicts of interest at the Department of Labor, which has been developing its own proposal to expand fiduciary responsibilities to advisors to retirement plans and plan participants. The DoL is expected in the first half of next year to unveil a revised proposal to expand the definition of fiduciary under the 1974 Employee Retirement Income Security Act, which would likely include a reformulation of the longstanding five-part test to determine whether a retirement-plan advisor is acting as a fiduciary.
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